Catherine Murray: Making sense of the market meltdown
ANALYSIS: Even for someone like me who spent 15 years on Wall Street trading desks covering the hedge funds and mutual fund managers, it was shocking when I saw a 1,000-point drop on the Dow Monday morning. But I didn’t think it was full-blown market panic.
Why do I say this?
First thing I did was look at the stock price moves of bellwether companies that my former clients liked to buy and would sell only if they were truly afraid.
So, I looked at the intraday moves on Procter & Gamble, Pfizer and Goldman Sachs (full disclosure: I used to work there, and it was fantastic). All of these stocks dropped in-line with the Dow, but they spiked right back up -- telling me this wasn’t a panic. Meaning the men and women who might run your mutual fund weren’t selling good companies. They still believe the world is strong enough for us to afford the basics (toilet paper from Procter, pharmaceuticals from Pfizer, and use Goldman for capital, investments and trade).
Thinking we weren’t in a panic, I had to find out what happened and what will happen next. I checked with a few former institutional clients, and here’s the read: it’s all about the macro hedge funds.
Macro hedge funds tend to invest anywhere in the world, in most asset classes and take big bets. When they change their thinking, they can move markets and I think that is what we saw this morning.
When I say they “move markets”, imagine this scenario: If a macro hedge fund manages $50-billion, levers it up to have $150-billion, and their investment strategy is working against them (meaning they are bleeding money), their firm’s risk manager could call them and say: “You have too much risk on your book, it’s going against you, and you need to unwind your positions if we want to stay in business.”
Now imagine if it wasn’t just one macro strategy suffering losses.
So what is the investment strategy that was unwound?
I’m hearing the catalyst was the weaker U.S. dollar vs. the euro.
How could this cause havoc in equites? Follow me on this one: Most investors have been betting the U.S. dollar strength would continue, not weaken. Makes sense since expectations have been for the Fed to raise rates in September, which would lead to a stronger U.S. dollar versus all other world currencies (money chases higher rates). The reason for the pause in U.S. dollar strength is China. China’s weaker economy and its volatile equity market is causing investors to question how the Fed can raise rates, if the second-largest economy in the world is much more fragile than expected. So the manager sells out of that trade. Depending on how deep in the red they are, they might have to sell some equities to raise cash. They might also want to short the equity market to try to make money on the selloff, only adding to the downward pressure.
While global growth fears are likely valid, my former clients and colleagues weren’t panicked and had their list of stocks to buy. I recognize these moves feel painful. It’s less painful if you begin to understand why it happened and what’s next. I hope this helped explain what happened today. As for what’s next, this is what we ask our great BNN guests every day, so tune in!
Catherine Murray is the host of Business Day. Follow her on Twitter @catherinebnn.
Why do I say this?
First thing I did was look at the stock price moves of bellwether companies that my former clients liked to buy and would sell only if they were truly afraid.
So, I looked at the intraday moves on Procter & Gamble, Pfizer and Goldman Sachs (full disclosure: I used to work there, and it was fantastic). All of these stocks dropped in-line with the Dow, but they spiked right back up -- telling me this wasn’t a panic. Meaning the men and women who might run your mutual fund weren’t selling good companies. They still believe the world is strong enough for us to afford the basics (toilet paper from Procter, pharmaceuticals from Pfizer, and use Goldman for capital, investments and trade).
Thinking we weren’t in a panic, I had to find out what happened and what will happen next. I checked with a few former institutional clients, and here’s the read: it’s all about the macro hedge funds.
Macro hedge funds tend to invest anywhere in the world, in most asset classes and take big bets. When they change their thinking, they can move markets and I think that is what we saw this morning.
When I say they “move markets”, imagine this scenario: If a macro hedge fund manages $50-billion, levers it up to have $150-billion, and their investment strategy is working against them (meaning they are bleeding money), their firm’s risk manager could call them and say: “You have too much risk on your book, it’s going against you, and you need to unwind your positions if we want to stay in business.”
Now imagine if it wasn’t just one macro strategy suffering losses.
So what is the investment strategy that was unwound?
I’m hearing the catalyst was the weaker U.S. dollar vs. the euro.
How could this cause havoc in equites? Follow me on this one: Most investors have been betting the U.S. dollar strength would continue, not weaken. Makes sense since expectations have been for the Fed to raise rates in September, which would lead to a stronger U.S. dollar versus all other world currencies (money chases higher rates). The reason for the pause in U.S. dollar strength is China. China’s weaker economy and its volatile equity market is causing investors to question how the Fed can raise rates, if the second-largest economy in the world is much more fragile than expected. So the manager sells out of that trade. Depending on how deep in the red they are, they might have to sell some equities to raise cash. They might also want to short the equity market to try to make money on the selloff, only adding to the downward pressure.
While global growth fears are likely valid, my former clients and colleagues weren’t panicked and had their list of stocks to buy. I recognize these moves feel painful. It’s less painful if you begin to understand why it happened and what’s next. I hope this helped explain what happened today. As for what’s next, this is what we ask our great BNN guests every day, so tune in!
Catherine Murray is the host of Business Day. Follow her on Twitter @catherinebnn.
No comments:
Post a Comment